Understanding Bounded Rationality And Biases In Business Boundaries: An Essay.

Discussion

Describe about the Business Boundaries and Procedures.

The essay at hand aims to discuss a quotation from Herbert A. Simon (Professor of Administration at the Graduate School of Industrial Administration, Carnegie Institute of Technology) referring to “Bounded Rationality” and its relationship with Bias. Simon is considered the prophet of “Bounded Rationality” with his writings being widely acclaimed especially in the field of Economics. The term was first coined by Simon in 1957 in his book Models of Man and the quotation under discussion is also extracted from the same. The book was an early proponent of the theory and had at that time just introduced the concept in the field of social sciences. It was a highly debated topic in the next decade, till it gathered buoyancy over a period of time. Simon had also engaged in further work on the subject to become an unquestioned messiah on the subject. Today the works of Simon are regarded as gospel in the field of social sciences, especially in the field of economics (Economist, 2009).

To start the discussion, it is pertinent to rehearse Simon’s quote from Models of Man, that says, “The capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required for objectively rational behaviour in the real world -- or even for a reasonable approximation to such objective rationality”.

Simon, in Part IV the book goes on to establish this statement in light of the debate over Rationality and Irrationality. The author states that the rationality of action of a person (author chooses to nomenclature the person as an “actor”) composes him to create a dummy model of the real life situation and conclude how to deal with it. This seems normal to the cognitive domain of a normal human being, as a model of problem solving. However, Simon argues that the model is inadequate to recreate the actual situation and is far from reality. Hence, a rational behaviour towards the model may be inadequate and the same actions will be far from optimal in real life situations. Author states that the construction of the simplified model is based on the perception, cognition and learning of the person. All these three pose the threat of limitation that a human may suffer from. No human is all encompassing in terms of knowledge and experience. Every individual sees a part of the real life which, in isolation is inadequate to explain the whole, which nobody can perceive. The reason stated is that all humans are limited in their content of knowledge, skill and foresight. As a result, combination of all three partial characteristics, lead to partial view of the problem (Barros, 2010).

Bounded Rationality

This partial view is actually considered as “the problem” by a person, which in reality is a gross misnomer and may be very far off from the actual problem. Simon argues that this happens most of the time and gives rise to a situation, wherein, the actor has conceived a solution to something that he construes as a problem. In reality the problem being elsewhere, the solution becomes futile, giving rise to a failure. According to the author, the administrative man is a similar character as this actor. Hence, the solutions formulated provided in real life by certain actors, are always after seeing the part of the problem that the actors can view, and never the whole. However, these solutions are institutionalised and are mandatory on many, who view the other aspects of the problem. Many a times they differ on the solutions imposed on them by the other actors due to administrative reasons. This gives rise to conflicts in an administrative setup. Another handicap that an administrative man faces is the personal psychological makeup. This gives rise to the sense of bias, which skews the decision making of humans (Simonsen, 1994).

It is pertinent here to shift our focus on the concept of Bias. As per definition, bias is supposed to be an outlook that is developed from holding a partial perspective about anything. It is generally one sided (or a few sided but never all sided), lacking a neutral point of view. In common parlance, it is understood of lacking an open mind towards anything. In the field of social sciences, there are four types of biases that have been identified till date. They are:

Cognitive bias – it is a misnomer in the thought process that results in distorted thinking. This involves not only thoughts, but also the outcome of thoughts like analysis of situations in the wrong light, remembering the erroneous incidents or the incorrect side of right incidents. Bias deviates from the standard procedure of thinking and judgement. The inferences drawn up are often unreasonable and void of logic. They are instituted just because someone thought of it in a certain way, and the others did not object. This kind of bias leads to distortion in perceptions, inaccuracy in judgement, illogical interpretation (Hortal, 2008). Types of Cognitive bias identified are:

• Anchoring
• Apophenia
• Attribution bias
• Confirmation bias
• Framing
• Halo effect
• Self-serving bias

Conflict of interest – this type of bias arises when the interests of two interacting individuals (or groups) do not match with each other, and often end up at loggerheads. Such situations give rise to a deadlock condition and can be broken through external interventions only. However, bias sets in only when the parties to the conflict try to find a way out which is devoid of logic. This generally gives rise to a negative strain of activity and related to corruption. One (or both) of the parties act in an unprofessional manner, that violates the rational choice of actions. The actions now are driven by self interest as against the interest of the job at hand (Jones, 2003). Types of conflicts of interest that give rise to personal interest are:

• Bribery
• Favoritism
• Funding bias
• Insider trading
• Lobbying
• Match fixing
• Regulatory issues
• Shilling

Biases

occurs while collecting and analysing data for specific purpose. The error occurs when the data collection is laden with bias. The bias sets in when the entire mechanism of collection has built in flaw. It is generally a case of mix-up of cause and effect relationships. A typical example is of media interviews of affected parties. A version of an accident victim will always portray the other party as the culprit. The unbiased view may be provided by a bystander, as long as the person is not suffering from cognitive bias. But the unbiased information collection design should comprise of all the three parties and not only one. Any interview designed for only one party is laden with statistical bias in its findings (Philip M. Podsakoff, 2003).

Contextual bias – this kind of bias originates due to intervention of a person or a set of knowledge over-running the reality. The set of knowledge may be textual or academic matter, personal intervention, copying or plagiarism, oversimplifying things by use of formulae for generalising complex situations, etc. Types of contextual bias are:

• Academic bias
• Educational bias
• Experimenter bias
• Full text on net bias
• Inductive bias
• Media bias
• Publication bias
• Reporting bias & social desirability bias(Kashin et al., 2015).

These biases govern the general outcome of responses to any stimulus that requires cognitive inputs. The biases do not govern non-cognitive or reflex actions. The subject of the bias may vary from a person to a thing to a situation to a concept to anything that can create an impact on the cognitive domain of a rational human being. However, in the theory of bias, this is the very rationality that is questioned and studied for aberrations. It is commonly believed that bias arises from the human prejudice and intuition. Bias is closely related to prejudice, which is formation of a prejudgement, even before becoming fully aware of the realities. It is and assumption that “this must have had happened, since, that person (or group of persons) is like this”. Maybe the reality is that the subject perceived as the culprit actually had no say in the matter. Prejudice is formed due to inherent ideas and learning that a person may have developed over time due to experience or interaction with the social surroundings. This leads to a person viewing a problem through partisan lenses. The viewpoint is never normal and majorly negative in nature. Another aberration causing stimulus is the intuition of a person. This develops from pre-acquired knowledge and the self-analysis of the knowledge to a personal foresight. All of which may suffer from biases, resulting in the entire viewpoint being skewed (Weber, 2010).

Conclusion

The bias gives rise to lack of rationality that Simon refers to as “Bounded Rationality”. Where Simon talks of rationality being bounded by the personal characteristics of an actor, the author are in other terms referring to the existence of bias. Thus, the concept of bias and Simon’s viewpoint are just two sides of the same coin.

References

Barros, G., 2010. Herbert A. Simon and the concept of rationality: boundaries and procedures. [Online] Available at: https://www.scielo.br/scielo.php?script=sci_arttext&pid=S0101-31572010000300006 [Accessed 15 October 2016].

Economist, 2009. Herbert Simon. [Online] Available at: https://www.economist.com/node/13350892 [Accessed 15 October 2016].

Hortal, A., 2008. Empiricism in Herbert Simon: “Administrative Behavior” within the evolution of the Bounded Procedural Rationality Model. [Online] Available at: https://www.academia.edu/6313136/Empiricism_in_Herbert_Simon_Administrative_Behavior_within_the_evolution_of_the_Bounded_Procedural_Rationality_Model [Accessed 15 October 2016].

Jones, B., 2003. Bounded rationality and politial sciene. [Online] Available at: https://www.esf.edu/es/felleman/696AM%20Bounded%20Rationality.pdf [Accessed 15 October 2016].

Kashin, K., King, G. & Soneji, S., 2015. Explaining Systematic Bias and Nontransparency in U.S. Social Security Administration Forecasts. [Online] Available at: https://gking.harvard.edu/files/gking/files/political_analysis-2015-kashin-pan-mpv011.pdf [Accessed 15 October 2016].

Philip M. Podsakoff, S.B.M.a.J.-Y.L., 2003. Common Method Biases in Behavioral Research: A Critical Review of the Literature and Recommended Remedies; https://www.jwalkonline.org/docs/Grad%20Classes/Survey/articles/required/Podsakoff%20-%20common%20method%20biases.pdf. Journal of Applied Psychology, 88(5), pp.879-903. Available at: https://www.jwalkonline.org/docs/Grad%20Classes/Survey/articles/required/Podsakoff%20-%20common%20method%20biases.pdf [Accessed 15 October 2016].

Simonsen, J., 1994. Herbert A. Simon: Administrative Behavior How organizations can be understood in terms of decision processes. [Online] Available at: https://jespersimonsen.dk/Downloads/Simon-introduction.pdf [Accessed 15 October 2016].

Weber, L., 2010. Expanding the Concept of Bounded Rationality in TCE:. [Online] Available at: cor.web.uci.edu/files/2013/02/Weber-Mayer-2010_BR.docx [Accessed 15 October 2016].